About this Author

College chemistry, 1983

The 2002 Model

After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases.
To contact Derek email him directly: derekb.lowe@gmail.com
Twitter: Dereklowe

January 5, 2011

How to Fund a Nonprofit Drug Company - And Others?

Posted by Derek

Here's a business idea for a nonprofit drug company, sent along by reader and entrepreneur Matt Grosso. I don't necessarily think that it would work (see below), but it's worth talking about, since some of its features are worthwhile. Others, though, illustrate what may be some common misperceptions of how drug development works. Here's the key feature:

The idea here is to create a non-profit which would accept contributions for testing and bringing to market specific drugs. . .Members would vote with their contribution dollars for specific drugs. Paid staff would curate a wiki that supported periodic comparisons between various candidates approaching readiness for a specific market, which would ensure that that member votes had the benefit of the best available information and expert opinion.

This could create an alternate route for drug startups focused on particular compounds to get their product to market.

I think that the ability to specifically take in contributions is a good one - people and organizations are more likely to fund defined aims that they agree with. One big problem, though, is that there's a limit to which we can define such things in this business. And that might make the whole idea break down.

To be honest, if a nonprofit really took in contributions for the development of specific drugs, they'd run a great risk of disappointing and enraging their donation base. That's because the honking huge majority of specific drugs in development never make it. The success rates in the clinic are pretty well known: roughly 90% of everything that goes into clinical trials never makes it to market. That's a hard sell for contributors! And if you moved the point at which you asked for donations back into the preclinical stage, the situation would get much, much worse. At the "Hey, we just thought of a neat new target" step, you'd be offering your contributors worse odds and payoffs than they could get in the state lottery.

For new compounds and new modes of action, the risks decrease in roughly the following order. At the same time, the time it takes to get an answer increases in the roughly the same way:

1. Specific single compound with a defined mechanism. Hold your breath, and good luck!2. Defined chemical class of compounds targeting the same mechanism. Now you've got some fallback, although it might not be enough to help in case of trouble. 3. Specific mechanism, with several chemical series. This gives you several shots, although if your mechanism of action is off, all will still be in vain.4. Phenotypic readout with a range of compounds (that is, they seem to do the right thing, but you're not sure how). Risk varies according to how realistic your assays are, and how many different compounds you've picked up.5. Targeting a broad class of related mechanisms - for example, "reduce LDL", "disrupt bacterial membranes", "interrupt inflammatory cascade". Note that we're now getting farther and farther away from individual compounds.6. Targeting one specific therapeutic area: antivirals, Alzheimer's, osteoporosis, etc.7. Trying to balance things out with several therapeutic areas, with projects in each one at varying levels of risk.

Note that we've also illustrated the progression from "wing and a prayer startup" to "fully integrated drug company". That follows exactly from the levels of risk involved, which correlates with the amount of money on the table as well, in exactly the way the ranking of poker hands correlates with how likely they are to occur. Note also that even in that final stage, we apparently still have not mitigated the risks enough, given our cost structure. (Look at the state of the industry).

To get back to the nonprofit idea, another thing that might work out less well in practice than it does in principle might be that wiki for the potential investors/donors. This is what companies try to do internally: comparing their programs by the same criteria, head to head, then determining how to resource them. 'Taint easy. I don't know of any organization that truly thinks that they do as well at this as they should. Even a bunch of perfectly clear-headed and honest assessments (which, by the way, cannot be universally assumed) are still complicated by unquantifiable risks. I think that people might be alarmed by the number of times you just have to push things ahead to see what's going to happen.

Even after all these qualifications, though, I think that there's merit in the idea of breaking out individual drug development programs. I've long kicked around the idea of whether a company could fund programs by essentially selling shares in its various clinical candidates, with a cut of the profits coming if things work out. It would be an accounting mess, and everyone would have to keep those failure rates in mind, but there are still people who'd be willing to take a crack at it, for a given level of possible return. Those donors/investors might even be less put out than the charitable/nonprofit ones - everyone's had investments go bad, but no one wants to feel like their charitable donation was wasted. Thoughts?

You say: "I've long kicked around the idea of whether a company could fund programs by essentially selling shares in its various clinical candidates, with a cut of the profits coming if things work out."

Running a new project would then be just like running a start up with a set burn rate and the declaration of the clinical candidate would be equivalent to an IPO at which time you offer shares. The quality of the drug candidate and the idea (i.e. market return) would presumably dictate the cash raised at the IPO in the open market i.e. not biased by portfolio management, and internal company bias.

As the compound progresses, at each clinical milestone you could presumably raise cash by diluting the shares a bit for future funding.

Could this be done internally as well where the mothership/phama/biotech parent is the venture capital company, or is it already?

We wouldn't have to invest in crappy candidates we don't like from company-X in order to our hands on the good candidates from the same company-X that we do like. We could all balance our own risks by managing our own portfolio across the clinical development pipeline.

coupled to this idea is the list of disease/therapy areas that don't get served by the commercial/profit-driven Pharma:
Malaria and tuberculosis (the afflicted are overwhelmingly poor, uninsured and foreign) top the list.
Another problem that profit-driven Pharma can't/won't address is novel antibiotics for resistant organisms. The FDA would restrict such a new cmpd to only the most dire cases, so the market would be tiny and unprofitable (and pirates abroad would copy it and sell it and cultivate resistant organisms to it...)

An organisation with this sort of mission (whether non-profit or commericial) will need for demonstrate that they have the appropriate capability and competence to bring drugs to market. Had I funds available for develpment of a drug, I'm not sure that I'd want to hand it over to wiki-curators (paid or otherwise). The voting would also be a concern because anybody handing out funds would want to be very clear about what they were getting for their money.

On the subject of judging individual drug project prospects. It was my understanding that Lilly had formed an internal prediction markets (http://en.wikipedia.org/wiki/Prediction_market). Does anybody know how well they worked their?

9. David Formerly Known as a Chemist on January 5, 2011 2:26 PM writes...

This is already being done in practice. There are numerous not-for-profit organizations investing in new drug research ranging from early discovery through clinical development. Most of these tend to be focused on orphan genetic diseases. Spinal muscular atrophy and Huntington's disease come to mind, look up FSMA and CHDI, respectively. These are funded by people/families that are personally impacted by these diseases, not investors looking for a financial return.

I do think there are a number of examples were non-profits/foundations have provided essential support to key people or organizations that ultimately lead to viable treatments but to expand this beyond limited case by case exceptions would not seem to add much to dearth of new drugs. First while I understand a reaction to current Pharma defining Profits rather than introduction of new drugs as the key marker for success a sustained industrial setting has a greater probability for developing not only single by multiple new drugs. Will a non-profit that works once be able to repeat such an effort? Can such really recruit and hold on to the wide range of expertise that will be needed or will the apply a "virtual model" that is workable but not necessarily efficient or always effective.

More so although perhaps a wiki approach could provide a bit more direct distribution of info wouldn't it still likely lead to shifts of stronger support for those who can create "slick presentations" and hire best consultants/experts regardless of true relative value? Appears not too different than now in biotech where its not always the best science that gets funded because sometimes the story is too complex to simplify for investors. There is enough chasing of "fads" and would seems to encourage even more move away from following science (which granted is often slow and costly and unpredictable)

It would difficult to raise money from friends and family to sustain such a long and capital intensive investment. If you've seen the movie "Extraordinary Measures", based on John Crowley and his two children with Pompe disease (started a company to treat Pompe disease- now Genzyme's Cerezyme), he was able to provide some initial funding himself, but after that, he needed venture capital money.

Rare and neglected diseases are probably the only areas where a non-profit status would be able to survive. Neglected diseases can be funded by large non-profit organization like the Gates Foundation, Rockefeller Foundation, etc. The best example so far is The Institute for OneWorld Health, which has a compound to treat visceral leishmaniasis and other diseases specific for the developing world. Also, there is more incentive to develop these neglected/rare diseases because if a company gets a neglected/rare disease treatment approved by the FDA, a voucher will be given to have a FDA priority review of another candidate. This incentive allows companies to speed up FDA review as well as be able to sell the voucher (***estimate $300 million [what the people think it's worth but no truth to it]) since it is transferable.

It's more a matter of "no guts; no glory" than anything else. Nobody has any "guts" anymore. VC and Big Pharma CEO's are so risk-intolerant, they all ought to be in the utilities sector or some area where everything is predictable years in advance including the general size of your customer base. Drug research is very, very, very uncertain and risky, and the dysfunctional FDA doesn't help any. A new drug, though, can also be very, very profitable. If all you want to do is reposition/repackage existing products until your patent runs out, you are dooming a lot of people to disease or death just because YOU put your shareholders short term comfort zone ahead of your mission statement.

The Cystic Fibrosis Foundation (CFF) has invested several hundred million dollars into supporting R&D at quite a few different pharmas and biotechs, and several compounds have come out of these efforts that are now in late stage clinical trials. However, note that the CFF leadership (which has quite a lot of science & business and medical experience) decides which investments to make, not the "members" directly as Matt Grosso was suggesting.

This is an idea near and dear to my heart, and I've been struggling with it for years. Can an organization be created where the goal is new products for unmet medical needs FIRST, and profit only peripherally in the picture for organizational sustainability. In other words, a nonprofit pharma that *initially* is funded by philanthropists or foundations (with deep pockets a la Bill & Melinda Gates, Rockerfeller, etc), but eventually through advancement and subsequent outlicensing of drug candidates (pre phase 3 obviously) could garner enough revenue to support ongoing operations. Such a model would remove investor pressures, downsizing, and stoopid decisions (hopefully) that occur in larger organizations. Also, I disagree with a previous commenter #3 - I'm not aware of med chem University labs operating like drug development organizations. Univsity professors are still beholden to the NIH, and we all know that the NIH doesn't support true drug development.

Its a big sky idea, and I think it could work. However, it requires bold people and a huge pile of money to give it any chance at success...two resources in short supply these days.

.... a long time ago, in a galaxy far away .. lived a man named Henry Wellcome. Destined to die without heirs, he set up a charitable foundation which had a business component whose profits were used to keep the pharmaceutical business running, with the remainder to be used to make donations to medical research. Its motto was "Research is our only stock holder." Then, in 1995, the dream was traded for a bowl of porridge and a lifetime supply of Zantac.

I think I would implement this by taking contributions into a general fund, and then allocating points for voting based on the contribution.

Someone could then allocate all their points to a particular therapeutic area if they feel they don't add any information to the selection process but they care about one treatment outcome more than others.

Importantly though, people who follow their particular treatment area of interest closely would have the opportunity to devote their voting points to something more specific. Your range of levels of detail 2 to 5 might be the right place.

Naturally, if I have used up my points and I want to keep voting I can do so by adding real money!

The key thing is you donate your money, then you vote your points, but you are agreeing ahead of time that your money will be spent whether your
vote wins or not.

A separate question:

Aren't their points in development though where you have expensive forks in the development process that a collective intelligence mechanism
could help with? Granted your average donor wouldn't have the expertise to help with that by themselves but could it help to have some mechanism to aggregate anonymous (thus independent) but costly (thus not frivolous or uninformed, eg, paid members or staff only) input from a wider group than just the researchers directly involved at that point?

Anyhow, I like the notion that companies should try harder or have an easier way to share individual candidate risks with outside orgs.

Cancer Research Technologies is an interesting example of an alternative business model. It's wholly owned by Cancer Research UK which is a charity. They investigate areas that big pharma deem too high risk, or too small market.
A major plus is that if CRT gets a compound to proof of principle or PhI, it significantly de-risks further investigation of the area for big pharma, so ultimately everyone wins. They have quite a few collaborations running too.
They don't have shareholders, so the share price doesn't take a kicking whenever something fails and this seems to give a better attitude to risk. They do still have a responsibility to spend the charity's money wisely, and any profits go back to the charity. So not exactly a not-for-profit, but definitely different!

The majority of drug companies need not do research, and there are better models than current generics for this.
- An HMO could produce the WHO essential drugs at cost+.
- a government could commission its health authority, which would also minimise the approval problems.
- hospitals or HMOs could organise and give away medicines, as part of their service.